In a report released last week, the US Government Accountability Office urged federal agencies to work with the Internal Revenue Service in order to ensure that firms are not improperly reducing their tax liability by putting in place deductions for civil settlement fines and penalties.
Under federal law, compensation payments can be deducted from a firm's tax bill, but fines and penalties cannot. However, the GAO report suggested that the distinction between the categories is often unclear.
According to a New York Times report on the matter, Senate Finance Committee leaders Charles Grassley (R-Iowa) and Max Baucus (D-Montana) have pledged to introduce legislation clarifying the rules and requiring firms to report settlement information to the IRS.
"It is galling that artfully crafted settlement agreements create loopholes that allow wrongdoers to escape the full impact of fines and water down any deterrent effect," Senator Baucus observed.
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